Translate

Wednesday, June 5, 2013

Thursday's Rally In Gold And Silver Temporary Strength Or The End Of Correction?

Thursday's Rally In
Gold And Silver
Temporary Strength Or The End Of Correction?

The only thing that’s free right now is the air that we breathe. Other than
that it costs to manufacture every object and commodity in the world. It
takes a certain amount of money to extract a barrel of crude in Saudi
Arabia, to make a car in Detroit, or produce an iPad in China.

There is also a certain cost to producing an ounce of gold. It doesn’t grow
on trees. Tiny nuggets don’t rain down from the sky. It costs to explore. It
costs to extract. It costs to finance loans and it costs to pay royalties.
There are additional costs such as administration, equipment, environmental
remedies and others. These are called the “all-in” costs.

Mines age and get depleted and extracting the gold gets more challenging and
costly over time. Average grades of ore have fallen by 30% since 1999,
according to GFMS, a consulting group, making it more difficult to extract
gold and from ever greater depths. Finding new deposits is becoming harder.
If in 2002 gold miners spent $500 million on exploration, by 2008 they were
spending $3 billion, but finding much less.

So how much does it cost to make an ounce of gold today?

That is an interesting question because just like a car manufacturer will
not sell a car for less than it costs to produce it, neither will mining
companies sell gold for less than it takes them to extract it from the
ground. And the cost of production is rising due to lower grade ore and the
rise in the costs of compliance and remediation. As gold prices soared over
the past decade, production costs inched higher including the prices for
equipment, materials, labour and energy.

According to a recent Forbes Magazine article both Barrick Gold and
Goldcorp, the largest mining companies, project that their all-in cash costs
will be between $1,000 and $1,100 an ounce for 2013. In 2012, mining
companies reported all-in costs such as: GG $1,082, Barrick Gold,
1,227, Yamana Gold $1,247, IAG $1377, and Agnico-Eagle, $1,343.

According to the Forbes article, a survey of 60 gold mining companies,
apparently less efficient than the giants, resulted in an average production
cost of $1,391. That is uncomfortably too close to where the price of gold
was at the bottom this year.

Of course, it’s possible that if the price of gold were to drop, mining
companies could become more efficient and thus cuts their costs and be more
profitable. It makes sense that the inverse may be true as well, that as
prices were rising, mining companies expanded and perhaps operated at high
capacity the mines that are the most expensive to run.

World gold production is currently around 2,500 metric tons per year. The
all-time high was reached in 2001, with 2,600 metric tons of gold production
worldwide. It is interesting to note that production in 1900 was around 400
metric tons per year when the price per ounce was about $19 an ounce.

A Financial
Times story last month says that earnings data are confirming that the
decade-long expansion in the mining services industry is all but over.
The reduction in mining investment is severely affecting demand for
equipment such as trucks, shovels and underground machinery. Caterpillar,
the world’s largest manufacturer of earthmoving equipment, has reported a 45
per cent drop in profits in the first quarter.

Does the cost per ounce of mining an ounce of gold provide a floor for the
price? One can argue that theoretically the price could go lower than the
cost of manufacture, but it couldn’t stay there for long. Mining companies
would have no incentive to extract the gold and it would remain buried
underground. They would have to cut capital spending, defer exploration and
capital development programs and probably cut dividends. There would
be a decline in supply and after a while, when demand would outstrip supply,
the price would climb up again.

The abovementioned facts suggest that sooner or later the price of gold (and
– with it – the whole precious metals sector as well) will start to rise
again, to cope with the rising costs. But these facts alone cannot help us
estimate the turning point itself – let us then move on to the technical
part of today’s essay to see what immediate future holds for the yellow
metal.

The precious metals sector moved higher on Thursday, but the question
is if the move was significant enough to change the short-term outlook for
gold and silver. It has been – as we wrote in our previous articles –
bearish, as far as short and medium term are concerned. Let's examine the
situation.

1. There was a breakout above the declining
resistance line in gold and silver – however, it was invalidated on
Friday.

2. The volume in GDX was significant during Thursday’s
rally but it was surprisingly small in case of GLD ETF. It was average in
case of the SLV ETF. Therefore, the breakout (even though it was not
invalidated on Friday in case of the mining stocks) is not that reliable
in our view.

3. The USD Index declined quite significantly on
Thursday and yet we saw a rather average move higher in gold, so we
decided to analyze the relative performance (USD - precious metals) more
thoroughly. USD closed approximately at the 83 level, something it had
previously done on May 10. On May 10 gold, silver and the HUI Index closed
at: $1,448, $23.88 and 280, respectively. This means that mining stocks
are where they were back then and gold and silver are considerably lower
now. This does not bode well for the precious metals in the short and
medium term.

4. We have previously mentioned the reverse parabola in
the GLD to GDX ratio which meant that miners were declining more and more
rapidly relative to gold. This parabola was broken on Thursday, which is a
bullish sign - not a strong one, but still.

5. The move higher in silver just ahead of the cyclical
turning point is actually a bearish phenomenon. If the price is to reverse
its direction shortly, then if the most recent move is up, then the
reversal should take the market lower. The previous cyclical turning point
in silver worked in this way and it worked only too well. Silver's price
plunged at the cyclical turning point after moving slightly higher - to
the 20-day moving average. The chart below illustrates the situation
(charts courtesy by http://stockcharts.com.)

Naturally, silver (and, naturally SLV ETF) moved lower on Friday, which may
mean that the next downleg has already started.

Summing up, at this time we still think that the breakout in precious
metals is not in - and that lower values of silver will be seen before the
next big rally emerges. So far the USD-gold link is a strong indication
against going long and we don't think that the odds for the decline have
really changed. Not only have we seen a long-term breakout in the USD Index,
but we also see that gold and silver are responding more significantly to
dollar's rallies than to its declines.

********

To make sure that you are notified once the new features are implemented,
and get immediate access to our free thoughts on the market, including
information not available publicly, we urge you to sign up for our free gold newsletter.
Sign up today and you'll also get free, 7-day access to the Premium Sections
on our website, including valuable tools and charts dedicated to serious
Precious Metals Investors and Traders along with our 14 best gold investment
practices. It's free and you may unsubscribe at any time.

2 comments:

Anonymous
said...

Enjoying the service of Odyssey - Streaming - Radio is so easy.Regular workshops ensure that the staff at PVM Radio subdivision is not only up to date with the latest technological innovations, but also ensures that the customers from diverse backgrounds are offered the best possible services to suit their tastes.Many people will be happy with replaceable batteries for home use and occasional outings.

That Halloween, right after she turned four, she told the story over and over, to anyone who would listen, delighting in making them jump when she yelled the spooky ending. Of course, when it comes to song and ordered modulations and reinventions,Christina Aguilera and Britney Spears should be believed.Remember fall in love poems should say the exact thing you feel without hesitation and fear of being embarrassed, either you write fall in love poems yourself or choose from the famous fall in love poems.